The Ups and Downs of Rand Paul’s Tax Plan

The 2016 hopeful has released a bold plan to overhaul the U.S. tax code.

Can Republicans take back the tax issue in 2016? They haven’t won it, really, since 1988. That was seven presidential terms and four presidents ago. The GOP even managed to lose the tax issue outright to President Barack Obama in 2008 and 2012.

What’s the Grand Old Tax-Cutting Party to do? Can it recover its tax-cutting mojo in 2016? Sen. Rand Paul, R-Ky., thinks the answer is yes. He recently came out with a bold new tax reform plan he hopes to ride all the way to the White House. The plan would:

In place of seven tax brackets, there would be one (with a generous standard deduction for the first $50,000 of income). In place of hundreds of credits, deductions and other loopholes, there would be only a handful. Upon seeing this plan, conservative pundit Glenn Beck gushed: “I’m telling you, this is erotic, it is so good.”

Not sure about erotic. But the plan is indeed good.

Paul is trying to corner the market on all three goals of GOP tax reform: simplicity, fairness and growth. He does well on simplicity, very well on growth, but is vulnerable on fairness. Overall, I’ll give the plan four stars out of five: One star for boldness, one for eliminating the payroll tax (the largest tax most Americans pay, and the elimination of which is, in my view, the best way to reform Social Security), one star for cutting taxes (by an estimated $2 trillion over 10 years), and one star for being very, very pro-growth

The Paul plan, says the Tax Foundation, would boost gross domestic product by a full percentage point a year. Impressive, and needed.

On the other hand, it would, on a static analysis, increase the deficit by $3 trillion over 10 years. But not to worry. Paul has elsewhere proposed sizable spending trims that would cover much (though not all) of that gap.

Will Paul’s plan propel his candidacy? We shall see. Remember Herman Cain’s “Nine nine nine” mantra four years ago? Candidates with bold tax plans – Cain in 2013, Steve Forbes in 1996, Mike Huckabee in 2008 – often use the tax issue to catch fire early in a presidential race. And yet, these same candidates seem to fade early, as well. Why is that?

My theory is that voters are only superficially interested in the GOP’s holy trinity of fairness, simplicity and growth. What voters really want is lower taxes for themselves. Beyond that, they’re indifferent. And by that simple standard – Does it cut my taxes? – most GOP tax plans don’t survive scrutiny, because most of them actually raise taxes on large parts of the population, especially at the lower end.

Which brings us to the Paul plan’s downsides. I count six of them.

1. It favors the wealthy. In my view, Obama won the tax issue in ’08 and ’12 because his Republican opponents sought to raise taxes on the lower-income households while cutting them for the upper-income taxpayers. A better approach, then, is to cut taxes on everyone. That’s exactly what Paul is trying to do. The Tax Foundation estimated that the Paul plan, even when scored statically, would increase incomes for people in every decile of the income scale; but the biggest gains would go to those at the top.

2. It’s not really flat. The plan preserves a surprising array of loopholes and exemptions, including the charitable deduction, the mortgage-interest deduction, the child credit, the earned-income credit, and the mother of all loopholes, the tax exclusion for workplace health benefits. Retaining those popular giveaways may seem politically prudent, but it also destroys the plan’s simplicity and implicitly endorses social engineering. If we’re going to subsidize health care, housing, charity and work through the tax code, why stop there? Why not subsidize a thousand things? For starters, why not pay people to have babies? Oh wait. That’s the child credit. (By the way, Sen. Marco Rubio, R-Fla., wants to expand that credit dramatically, setting up a clear Rubio-Paul debate over ” families versus growth.”)

3. It won’t stay flat. In a democracy, a flat tax will not stay flat. Voters will shift the burden onto someone else, usually that small, unsympathetic minority known as the rich. That’s what happened with historic Reagan tax reform of 1986. It lasted a mere four years before morphing back into the disgraceful system it replaced.

4. It creates a VAT on top of an income tax. Value-added taxes are money machines for governments. We know this from 50 years of experience in Europe. VATs can be easily raised without voters fully understanding what’s going on, because they’re embedded in the price of everything. To be sure, a VAT could be more efficient and pro-growth than today’s corporate income tax, the high rate of which makes American business uncompetitive. But proposing a VAT on top of an income tax? That’s a Europe-sized mistake.

5. It retains the IRS. Paul’s plan wouldn’t actually abolish the IRS, it would only shrink it.For conservatives, the true policy is tax consumption, not production , or, to put it another way: Tax things, not people. And while Paul’s flat tax functions like a consumption tax, it’s still an income tax. That means “income” must still be defined, reported and policed. Which means we still need a powerful IRS coercing and harassing us. Blech.

6. It goes in the wrong direction. Paul wants to eliminate all excises and tariffs. We should increase them instead. We have to fund Uncle Sam somehow. Excises and tariffs are the best way to do so, if we want to keep government small. Which brings us to . . .

A better idea. While Paul is on the right track, and has the best plan to date, the way to win the nomination and take the tax issue away from Democrats is to propose the replacement of all existing federal taxes with an exclusive reliance on excises and tariffs.

Excises and tariffs are collected from manufacturers and importers rather than individuals. Along with federal land sales, they were the main revenue sources for Uncle Sam prior to the advent of income taxation in 1913.

In that golden tax era, you never encountered a tax man, never filled out a tax return, never endured a tax audit. Your employer never took taxes out of your paycheck. And your federal tax burden never exceeded a certain natural ceiling. The electorate could push back on excessive tax rates by changing their purchasing patterns. As Alexander Hamilton memorably explained in Federalist No. 21, “It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed. … If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds.”

A “tax things, not people” approach would put healthy down pressure on government, eliminate the IRS income police, and give us new freedom to minimize our own taxes. None of the current GOP tax plans would do any of those things, not even Paul’s.

Is Paul’s tax plan a game-changer? No. But it will prompt much-needed debates about freedom, economic growth, and (thanks to its payroll tax cut) the future of Social Security. With more and more Democrats now proposing higher Social Security benefits, that last item alone makes it the most important political development of 2015.

Dean Clancy, a former senior official in Congress and the White House, writes on U.S. health reform, budget and constitutional issues. Follow him at deanclancy.com or on twitter @deanclancy.

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Welcome to deanclancy.com, a site focused on current policy debates, with an emphasis on health care, budget, and tax reform issues, and American renewal.

Dean Clancy is a policy analyst, opinion writer, consultant, and public speaker with more than twenty years’ experience as a high-level policy advisor in Congress, the White House, and the health care industry.

Clancy is a partner at Adams Auld LLC and president and founder of HSAs for All, and serves as a volunteer advisor to the Compact for America Educational Foundation and a board member of several organizations including the Default Clock Committee and Opportunity Solutions Project (an affiliate of the Foundation for Government Accountability).

Clancy describes himself as a ‘decentralist.’ He opposes monopoly, public as well as private, and stands for the little guy and common sense.